UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2005
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from to
Commission file number 1-8496
COGNITRONICS CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 13-1953544
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Corporate Drive, Danbury, Connecticut 06810-4130
(Address of principal executive offices) (Zip Code)
(203) 830-3400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12
months, and (2) has been subject to such filing requirements
for the past 90 days. Yes x No
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes No x
The Registrant has 5,747,070 shares of Common Stock, $.20
par value per share outstanding at June 30, 2005.
Part I, Item 1.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, December 31,
2005 2004
(Unaudited)
----------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,953 $ 2,836
Marketable securities 7,026 5,847
Accounts receivable, net 1,144 4,466
Inventories 2,062 2,303
Other current assets 166 148
------- -------
TOTAL CURRENT ASSETS 13,351 15,600
LOANS TO OFFICERS 1,996 1,968
PROPERTY, PLANT AND EQUIPMENT, NET 790 922
GOODWILL 319 319
OTHER ASSETS 91 147
------- -------
$16,547 $18,956
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 268 $ 348
Accrued compensation and benefits 829 842
Deferred service revenue 782 576
Other accrued expenses 987 1,137
------- -------
TOTAL CURRENT LIABILITIES 2,866 2,903
OTHER NON-CURRENT LIABILITIES 918 1,038
STOCKHOLDERS' EQUITY
Common Stock, par value $.20 a
share, authorized 20,000,000 shares;
issued 5,866,878 shares 1,173 1,173
Additional paid-in capital 12,584 12,586
Retained earnings 415 2,865
Accumulated other comprehensive loss (250) (225)
Unearned compensation (222) (303)
------- -------
13,700 16,096
Less cost of 119,808 and 138,308
common shares in treasury (937) (1,081)
TOTAL STOCKHOLDERS' EQUITY 12,763 15,015
------- -------
$16,547 $18,956
======= =======
See Note to Condensed Consolidated Financial Statements.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
REVENUES:
Sales $1,068 $4,009 $3,298 $6,056
Service 567 234 1,066 448
------ ------ ------ ------
1,635 4,243 4,364 6,504
COST AND EXPENSES:
Cost of products sold
and services 991 1,744 2,223 3,257
Research and development 791 635 1,509 1,230
Selling, general and
administrative 1,609 1,505 3,189 3,025
Other (income), net (76) (32) (137) (63)
------ ------ ------ ------
3,315 3,852 6,784 7,449
Income(loss) before
income taxes (1,680) 391 (2,420) (945)
PROVISION FOR INCOME
TAXES 15 15 30 30
------ ------ ------ ------
NET INCOME (LOSS) (1,695) 376 (2,450) (975)
Currency translation
adjustment (46) (10) (25) 78
------- ------ ------- ------
COMPREHENSIVE INCOME(LOSS) $(1,741) $ 366 $(2,475) $ (897)
======= ====== ======= ======
NET INCOME(LOSS)PER SHARE:
Basic $(.30) $ .07 $(.43) $(.18)
Diluted $(.30) $ .06 $(.43) $(.18)
Weighted average number
of outstanding shares:
Basic 5,653,173 5,548,811 5,643,571 5,541,034
Diluted 5,653,173 6,278,428 5,643,571 5,541,034
See Note to Condensed Consolidated Financial Statements.
COGNITRONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Six Months Ended
June 30,
2005 2004
---- ----
NET CASH PROVIDED(USED) BY OPERATIONS $1,338 $ (245)
------ ------
INVESTING ACTIVITIES
Purchases of marketable securities (5,529) (4,463)
Sales of marketable securities 4,325 4,660
Additions to property, plant and
equipment, net (32) (84)
------ ------
NET CASH PROVIDED(USED) BY
INVESTING ACTIVITIES (1,236) 113
------ ------
FINANCING ACTIVITIES
Shares issued pursuant to employee
stock plans 30 14
------ ------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 30 14
------ ------
EFFECT OF EXCHANGE RATE DIFFERENCES (15) (2)
------ ------
INCREASE(DECREASE) IN CASH AND CASH
EQUIVALENTS 117 (120)
CASH AND CASH EQUIVALENTS- BEGINNING
OF PERIOD 2,836 2,877
------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD $2,953 $2,757
====== ======
INCOME TAXES PAID $ 2 $ 63
====== ======
INTEREST PAID $ 2 $ 5
====== ======
See Note to Condensed Consolidated Financial Statements.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2005
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month and
six-month periods ended June 30, 2005 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2005. The
balance sheet at December 31, 2004 has been derived from the audited
financial statements at that date. For further information, refer to the
consolidated financial statements and footnotes thereto and the quarterly
financial data included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2004.
Inventories (in thousands):
June 30, December 31,
2005 2004
------- ------------
Finished and in process $1,612 $1,572
Materials and purchased parts 450 731
------ ------
$2,062 $2,303
====== ======
Other Non-Current Liabilities (in thousands):
June 30, December 31,
2005 2004
-------- ------------
Accrued supplemental pension plan $ 345 $ 368
Accrued deferred compensation 194 207
Accrued pension expense 680 740
------ ------
1,219 1,315
Less current portion 301 277
------ ------
$ 918 $1,038
====== ======
Income Per Share
In computing basic earnings per share, the dilutive effect of stock options
and warrants are excluded; whereas, for dilutive earnings per share, they
are included.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value at the date of grant. The
Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees", and therefore recognizes no compensation expense for stock
options granted.
The Company applies the disclosure only provisions of the Statement of
Financial Accounting Standards Board ("SFAS") No. 123, "Accounting for
Stock-based Compensation" and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" for employee stock option awards.
Had compensation cost for the Company's stock option plans been determined
in accordance with the fair value-based method prescribed under SFAS 123,
the Company's net income(loss) and basic and diluted net income(loss) per
share would have approximated the pro forma amounts indicated below (dollars
in thousands except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Net income(loss) as reported $(1,695) $ 376 $(2,450) $(975)
Add: Stock-based compensation
expense included therein 77 96 157 192
Deduct: Total stock-based
compensation expense
determined under the fair
value based method (117) (171) (259) (400)
------- ----- ------- -------
Pro forma net income(loss) $(1,735) $ 301 $(2,552) $(1,183)
======= ===== ======= =======
Net income(loss) per share
As reported Basic $(.30) $ .07 $(.43) $(.18)
Diluted $(.30) $ .06 $(.43) $(.18)
Pro forma Basic $(.31) $ .05 $(.46) $(.21)
Diluted $(.31) $ .05 $(.46) $(.21)
There were no options granted in the periods ended June 30, 2005 and 2004.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (Revised 2004), "Share-based Payment" that will require the Company to
expense costs related to share-based payment transactions with employees.
With limited exceptions, SFAS No. 123(R) requires that the fair value of
share-based payments to employees be expensed over the period service is
received and eliminates the ability to account for these instruments under
the intrinsic value method prescribed by APB No. 25, and allowed under the
original provisions of SFAS No. 123. SFAS No. 123(R) becomes mandatorily
effective for the Company on January 1, 2006. SFAS No. 123(R) allows for
either prospective recognition of compensation expense or retrospective
recognition, which may be back to the original issuance of SFAS No. 123 or
only to interim periods in the year of adoption. The Company is currently
evaluating these transition methods.
Pension Plan
The Company and its domestic subsidiaries have a defined benefit pension
plan. No additional service cost benefits were earned subsequent to June 30,
1994. The Company's funding policy is to contribute amounts to the plan
sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional
amounts as the Company may determine to be appropriate from time to time.
The components of net periodic benefit cost of the plan for the three and
six months ended June 30 are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Interest cost on projected
benefit obligation $22 $23 $45 $46
Expected return on plan assets (14) (15) (29) (28)
Amortization of net loss 8 2 15 5
--- --- --- ---
Net periodic pension cost $16 $10 $31 $23
=== === === ===
The Company expects the funding requirement to be $211,000 in 2005 of which
$88,000 was funded during the six months ended June 30, 2005.
Operations by Industry Segments and Geographic Areas:
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Net Revenues
United States $1,054 $2,568 $ 2,775 $ 2,999
Europe 581 1,675 1,589 3,505
------ ------ ------- -------
$1,635 $4,243 $ 4,364 $ 6,504
====== ====== ======= =======
Operating Profit(Loss)
United States $ (960) $ 577 $(1,164) $ (638)
Europe (457) 93 (714) 277
------ ------ ------- -------
(1,417) 670 (1,878) (361)
General Corporate Expense 339 311 679 647
Other (income), net (76) (32) (137) (63)
------- ------ ------- -------
Income(loss) before income
taxes $(1,680) $ 391 $(2,420) $ (945)
======= ====== ======= =======
Total Assets
United States $15,516 $15,757
Europe 1,041 3,073
Intercompany eliminations (10)
------- -------
$16,547 $18,830
======= =======
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain Factors That May Affect Future Results
The following information, including, without limitation, the Quantitative
and Qualitative Disclosures About Market Risk that are not historical facts,
may be forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These statements generally are characterized by the use of terms such
as "believe", "expect" and "may". Although the Company believes that the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, the Company's actual results could differ materially
from those set forth in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, variability of
sales volume from quarter to quarter, product demand, pricing, market
acceptance, litigation, risk of dependence on significant customers and
third party suppliers, intellectual property rights, risks in product and
technology development and other risk factors detailed in this Quarterly
Report on Form 10-Q and in the Company's other Securities and Exchange
Commission filings.
Results of Operations
The Company reported net losses of $1,695,000 for the three months ended
June 30, 2005 and $2,450,000 for the six months ended June 30, 2005 versus
net income of $376,000 and a net loss of $975,000, respectively, in the
prior year periods.
Consolidated revenues for the quarter ended June 30, 2005 decreased $2.6
million (61%) to $1.6 million due to sales decreases in both the domestic
and the UK distributorship operations. The revenues in the domestic
operations decreased $1.5 million (59%) to $1.1 million due to a decrease of
$1.7 on sales, offset, in part, by an increase of $.2 million in service
income. Included in the 2004 revenues were sales of $1.7 million to a large
telecommunication service provider. The increase in service income reflects
an increasing base. Sales of the Company's UK distributorship operations
decreased $1.1 million (65%) due to lower volume. Consolidated revenues for
the six months ended June 30, 2005 decreased $2.1 million (33%) primarily
due to sales decrease of $1.9 (55%) in the UK distributorship operations due
to lower volume. The domestic sales decreased $.6 (22%) offset by an
increase of $.4 in maintenance income. Included in sales in 2004 was $1.7
million to a large telecommunication service provider versus $.3 million in
the current year period; however, the Company has received in July orders of
approximately $2 million from this customer. Offsetting lower sales to this
customer in 2005 were increased sales of $.7 million to a world-wide
telecommunication system integrator.
Gross margin percentage was 39% for the three months and 49% for the six
months ended June 30, 2005 and 59% and 50%, respectively, in the comparable
2004 periods. The three-month period ended June 30, 2005 versus the prior
year period was unfavorably impacted by lower sales volume and the
concomitant lower absorption of fixed costs.
Research and development expenses for the three and six-month periods ended
June 30, 2005 increased $.2 million (25%) and $.3 million (23%),
respectively, from the comparable 2004 periods due to higher material costs
and increased personnel costs due to increased salaries and headcount.
Selling, general and administrative expenses increased $.1 million (7%) and
$.2 million (5%) for the three and six-month periods ended June 30, 2005
versus the prior year periods due to higher professional fees, travel
expense and personnel costs.
Other income, net increased due to higher interest earned on cash balances
and marketable securities due to higher interest rates.
Liquidity and Sources of Capital
Net cash provided by operations for the six months ended June 30, 2005 was
$1.3 million versus the net cash used of $.2 million in the 2004 period. In
the 2005 period the positive cash flow from operations was primarily due to
the reduction of accounts receivable by $3.3, offset by a loss from operations.
Working capital and the ratio of current assets to current liabilities were
$10.5 million and 4.7:1 at June 30, 2005 compared to $12.7 million and 5.4:1
at December 31, 2004.
During the remainder of 2005, the Company may repurchase up to an additional
253,792 shares of its common stock and anticipates purchasing $.4 million of
equipment. Management believes that its cash and cash equivalents and
marketable securities will be sufficient to meet these needs in 2005.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not use derivative financial instruments. The Company has
Marketable Securities, which are exposed to changes in interest rates. Due
to the term of these securities and/or their variable rate provisions, a
change in interest rates should not have a material impact on their value.
Exchange rate fluctuations will impact the results of operations and the net
assets of the Company's UK distributorship operations. The UK pound was
stronger against the US dollar during the three-month and six-month periods
ended June 30, 2005 as compared to the comparable periods of 2004, so the
losses of the UK distributorship operations were translated into more
dollars than they would have in the 2004 periods. The relative value of the
UK pound to US dollar decreased by 7% from December 31, 2004 to June 30,
2005. At June 30, 2005, the UK distributorship operations had net assets of
$.5 million. The Company does not hedge this foreign currency net asset
exposure.
Item 4. Controls and Procedures
Cognitronics Corporation's management, including the Chief Executive Officer
and Chief Financial Officer, have conducted an evaluation of the
effectiveness of disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the disclosure controls and
procedures are effective as of the end of the period covered by this report
in ensuring that all material information required to be disclosed in this
quarterly report and all information required to be disclosed by the Company
under the Securities Exchange Act of 1934 has been made known to them in a
timely fashion. During the three months ended June 30, 2005, there were no
changes in the Company's internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls for financial reporting.
PART II
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Registrant's Annual Meeting of Stockholders was
held on May 12, 2005.
(b) Messrs. John T. Connors, Brian J. Kelley, Jack Meehan, William A.
Merritt and William J. Stuart were elected directors at the meeting.
(c) The following matters were voted upon by stockholders:
Withheld Broker
For or Against Abstain Non-votes
1. Election of five
Directors -
John T. Connors 5,267,825 104,820 378,328
Brian J. Kelley 5,353,395 19,250 378,328
Jack Meehan 5,360,717 11,928 378,328
William A. Merritt 5,360,917 11,728 378,328
William J. Stuart 5,362,217 10,428 378,328
2. To approve the selection
of Carlin, Charron &
Rosen, LLP as
independent auditors 5,341,842 23,325 7,478 378,328
Item 6. Exhibits
(a) Index to Exhibits
Exhibit
31.1 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COGNITRONICS CORPORATION
Registrant
Date: August 15, 2005 By /s/ Garrett Sullivan
Garrett Sullivan, Treasurer
and Chief Financial Officer